The Evolution of the Federal Tax System

Abstract

The evolution of the federal tax system has been from small volume of revenues to large volume, from a simple structure to a highly complicated and diverse structure, from almost complete reliance on indirect taxes to heavy reliance on progressive direct taxes. Over the three-fourths of a century of national life prior to the Civil War the tariff on imports was the overwhelmingly important source of federal tax revenue and during two-thirds of that period no other taxes were in effect. Basic developments in the federal tax system have come for the most part in three major waves which occurred during and after the Civil War, the World War and the recent depression. Each wave was characterized by a great extension and multiplication of revenue sources, followed (at least in the first and second waves) by a contraction and abandonment of sources, with a net long-term result of expansion and diversification of the system. The Civil War period added to the tariff, internal revenue taxes on liquor and tobacco as permanent revenue sources. The World War period enlarged the income tax, which had just been introduced, from a minor position to that of the major source of federal revenue, and added the estate tax. The outcome of the latest major tax wave, that of the recent depression period, is still uncertain, but there is little doubt that the permanent effects on the tax system will be of major character.' * Ph.D., I929, University of Wisconsin. Director of Tax Research, United States Treasury Department, since 1938. Chief Statistician, Wisconsin Tax Commission, I927-1932; Associate Professor of Economics, Graduate School of Public Administration, University of Cincinnati, 1932-1938. Author and joint author of various articles and works in the field of taxation. 1 Other waves of taxes which left no apparent permanent changes in the tax structure occurred during the first decade of national life, the War of i 8i2, and the Spanish-American War, respectively. The first Act of Congress in 1789 imposed a tariff for revenue and protection. The revenue was insufficient, and during the next few years taxes were imposed on the manufacture of whiskey, snuff and sugar, legal documents and carriages, and in 1798 a single payment direct tax levy was imposed on houses, slaves and lands. Collections from the various internal levies and the direct tax were relatively small, exceeding 15% of the collections from the tariff in only one year. All internal taxes were repealed in i802 or shortly thereafter. Opposition to internal taxation continued to be so strong that despite the requirements of the War of I812, no new taxation was provided until the summer of 1813 when taxes were imposed on liquors, sugar refining, carriages, auctions and financial instruments, and a broad list of manufacturers' sales, and a single payment direct tax imposed on houses, slaves and land. Tax rates were increased in I814 and in I815 the internal revenue, including the direct tax, nearly equalled the reduced customs receipts of that year. Following a very high customs yield in the next year, after the end of the war, the war taxes were practically all repealed. From I817 until the Civil War the tariff was practically the sole source of tax revenue, adjustments being made in the rates from time to time to meet the demands for revenue and protection. Revenues